All but one charge against Voya Financial has been dismissed in a lawsuit alleging that asset-based fees led to a 19-participant retirement plan paying $1,819 per participant for recordkeeping services in 2015.
The decision by U.S. District Judge Colm F. Connolly of the U.S. District Court for the District of Delaware says the Cornerstone Pediatric Profit Sharing Plan retained Voya to provide administrative and recordkeeping services to the plan pursuant to a group annuity contract. The plan sponsor also used Voya to prepare and deliver Rule 404a-5 participant fee disclosures.
For the services it provides the plan, Voya charges a maintenance fee of $15 to $30 per participant per year, as well as an asset-based fee, referred to in the contract as a “Daily Asset Charge.” The Daily Asset Charge varies by the level of plan services provided and the total value of the assets held under the contract and certain other related contracts.
The plaintiff, a participant in the plan, first alleged that Voya breached its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by charging excessive fees. But “a party does not act as a fiduciary with respect to the terms in the service agreement if it does not control the named fiduciary’s negotiation and approval of those terms,” Connolly wrote in his opinion, citing Renfro v. Unisys. He noted that the fees Voya charges the plan and its participants were set in the contract, and at the time the fee schedules were proposed, Voya had no relationship with the plan or its participants and could not have been a fiduciary.
Connolly rejected the plaintiff’s argument that because Voya can charge different Daily Asset Charges over the lifetime of the plan, it has discretion over the plan and is therefore a fiduciary. He pointed out that the Daily Asset Charge is set by a schedule the plan agreed to in the contract, and the only changes to the Daily Asset Charge occur based on the total asset value of the plan. “Because Voya was not a fiduciary of the plan with respect to the fees, it cannot be liable for breach of fiduciary duties for charging excessive fees,” Connolly concluded.
The plaintiff also alleged that Voya is liable for breach of co-fiduciary duties by charging excessive fees and providing “false and misleading” disclosures that violate Rule 404a-5. To be liable for a claim of breach of co-fiduciary duties, one must be a fiduciary, Connolly said. Because Voya was not a fiduciary with respect to the fees charged under the contract, Voya cannot be liable for breach of co-fiduciary duties for excessive fees.
However, the co-fiduciary issue did not need to be decided with regard to Voya providing “false and misleading” Rule 404a-5 disclosures, because the judge found Voya is a fiduciary in that matter. First, Connolly explained that Voya’s Rule 404a-5 disclosures include the “total gross annual operating expenses” and the “total net annual operating expenses” for each fund represented as percentages. For example, the 404a-5 disclosure reproduced in the amended complaint stated that the total net annual operating expenses for Vanguard VIF–Equity Income Port was 2.16%. But this figure did not represent just the operating expenses for the Vanguard VIF–Equity Income Port fund. Instead it represented the combination of the operating expenses for Vanguard VIF–Equity Income Port (which were 0.27%) and Voya’s asset-based fees (which were 1.49%). The plaintiff’s theory is that by combining the funds’ operating expenses with Voya’s fees rather than listing them separately, Voya is misleading the beneficiaries into thinking that the combined number only represents the operating cost of the fund.
Voya argued that it is not a fiduciary because preparing 404a-5 disclosures is a purely ministerial function. But the amended complaint alleges that “VOYA maintains discretion to determine the contents of the disclosures to plan participants required by ERISA, including the fee disclosures required by ERISA, and in fact prepares and distributes the disclosures to plan participants.” Connolly concluded that because the plaintiff alleged that Voya prepares and delivers the disclosures to plan participants and has discretionary authority to determine the contents of the disclosures, the plaintiff has properly alleged that Voya is a fiduciary with respect to the 404a-5 disclosures.
The judge rejected Voya’s argument that even if it is a fiduciary, its disclosures satisfy the requirements of 404a-5 and thus it has satisfied its fiduciary duties pertaining to the 404a-5 disclosures. Connolly said breach of fiduciary duties does not turn on whether the disclosure satisfies rule 404a-5. “The Third Circuit has explained that although ERISA ‘articulates a number of fiduciary duties, it is not exhaustive,’” he noted. “Rather, Congress relied upon the common law of trusts to define the general scope of trustees’ and other fiduciaries’ authority and responsibility.”
Connolly pointed out that among the common-law duties incorporated into ERISA is the duty to disclose material information, which “entails not only a negative duty not to misinform, but also an affirmative duty to inform when the trustee knows that silence might be harmful.”
In addition, he said he is not bound by, and disagrees with, a 7th U.S. Circuit Court of Appeals decision in Hecker v. Deere & Co. quoted by Voya that said, “The total fee, not the internal, post-collection distribution of the fee, is the critical figure for someone interested in the cost of including a certain investment in her portfolio and the net value of that investment.”
Connolly said, “There is a substantial likelihood an employee looking at these disclosures would think the listed fees were paid only to the listed funds as opposed to the listed funds and Voya. If that were the case, then the employee would be unlikely to complain about Voya’s fees to her trustee and advocate for a change in service provider, because she would not realize how much Voya was charging her. Accordingly, plaintiffs have at least established materiality to the degree required to survive a motion to dismiss.”
The plaintiff’s fourth and final claim for relief is that Voya is a party in interest within the meaning of ERISA and violated its prohibited transaction provisions by charging an unreasonable fee for services. Connolly pointed out that the parties agree that to state a claim under those provisions, the plaintiff must first allege that Voya was a party in interest. And, they also agree that Voya was not a party in interest prior to entering the contract. “Because Voya was not a party in interest when it negotiated the contract—including the fee schedules—Voya cannot be held liable under [the prohibited transaction provisions] for charging excessive fees,” Connolly concluded.